Sept 19 (Askume) – The Bank of England will keep interest rates unchanged on Thursday, awaiting signs of easing inflation risks and focusing on its ongoing bond sale decision, which is likely to be included in a report from Finance Minister Jeff Bezos’ first budget.
British inflation remained stable in August , but the services sector accelerated growth, which is important to the Bank of England. This explains why forecasters believe interest rates will fall more slowly than in the United States and the euro zone.
The Federal Reserve cut its inflation rate by half a percentage point on Wednesday, with Chairman Powell saying the move reflects “increased confidence” in the inflation outlook.
The Bank of England’s Monetary Policy Committee may adopt a more cautious stance on Thursday.
A Askume poll published last week showed all 65 economists said interest rates were likely to remain steady at 5.0%, after being cut from a 16-year high of 5.25% in August.
After Wednesday’s inflation data, financial markets saw the odds of a rate cut as roughly one in four, compared with a one in three chance a day earlier.
Reports on price pressures are mixed. Wage growth – another key indicator for MPC members – was lower than they expected last month,The economy remained stable in July .
But a business survey backed by the Monetary Policy Committee, the panel of policymakers, showed the decline in wage growth expectations had paused. Additionally, services sector inflation rose in August, though this was mainly due to volatility in air ticket prices.
Tim Graf, head of macro strategy at State Street Global Markets, said the inflation data “increases confidence that the Bank of England will remain on hold at its policy meeting, a confidence largely rated by markets.”
Economists polled by Askume agreed that support for keeping interest rates steady was 7 to 2. Last month, the Monetary Policy Committee voted 5-4 for budget cuts but said some in five thought the decision was very balanced.
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Bond investors are closely watching Thursday’s annual decision on the pace of the Bank of England’s quantitative tightening programme – the sale of hundreds of billions of pounds of British government bonds bought as part of previous efforts to stimulate the economy.
In September 2023, the Monetary Policy Committee voted to reduce the Bank of England’s gilt holdings by 100 billion pounds ($130 billion) through active sales and maturities, up from 80 billion pounds over the previous 12 months.
Some MPs have criticised the QT scheme because it has led to losses for the Bank of England, which in previous years has bought gilts at prices far above current selling prices. These losses are borne by already strained taxpayers.
But the Bank of England may announce a quick increase in QT on Thursday. With about 87 billion pounds of UK government debt set to mature next year, only 13 billion pounds are left for active selling.
Citigroup and JPMorgan Chase expect the Bank of England to expand the program to 120 billion pounds to maintain active gilt sales.
Francis Diamond, head of UK, euro and global inflation strategy at JPMorgan Chase, said in a research note that market reaction to the move would be limited.
Governor Andrew Bailey said QT would be needed to restore power if the Bank of England was to stimulate the economy again through bond purchases.
Treasury Secretary Reeves will be watching closely for the impact of Thursday’s decision on the national budget. When pressed by MPs, he said QT was an operational issue for the Bank of England.
But many economists believe Levy will change the government’s fiscal rules to exclude the impact of the Bank of England’s quantitative easing programme. This could give him billions of pounds of extra fiscal space in his first budget on 30 October, when he will be under pressure to increase public spending.
The New Economics Foundation think tank said maintaining the BoE’s current pace of bond sales would cost taxpayers around £24 billion a year by 2028/29. The company said it could save £13.5 billion a year by ceasing active selling.
NEF economist Dominic Caddick said: “The Bank of England must consider the value for money of these options and the chancellor must accept the fact that his fiscal rules place arbitrary constraints on his spending decisions.”
($1 = 0.7648 British pounds)
